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Competitiveness: Creating a Mongolian Economic Strategy

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  • 1. Competitiveness: Creating a Mongolian Economic Strategy Professor Michael E. Porter Institute for Strategy and Competitiveness Harvard Business School July, 2008 This presentation draws on ideas from Professor Porter’s articles and books, in particular, The Competitive Advantage of Nations (The Free Press, 1990), “Building the Microeconomic Foundations of Competitiveness,” in The Global Competitiveness Report 2006 (World Economic Forum, 2006), “Clusters and the New Competitive Agenda for Companies and Governments” in On Competition (Harvard Business School Press, 1998), and ongoing research on clusters and competitiveness. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means - electronic, mechanical, photocopying, recording, or otherwise - without the permission of Michael E. Porter. Further information on Professor Porter’s work and the Institute for Strategy and Competitiveness is available at www.isc.hbs.edu Version: July 21, 2008, 4pm 1 Copyright © 2007 Professor Michael E. Porter GCR South Africa 062007.ppt
  • 2. Prosperity Performance Selected Middle- and Lower-Income Countries PPP-adjusted GDP per Capita, 2007 $28,000 United Arab Emirates Slovenia $24,000 Czech Republic South Korea Cyprus Saudi Arabia Oman Portugal $20,000 Estonia Slovakia Hungary Lithuania Latvia $16,000 Poland Libya Croatia Botswana Russia Chile Argentina Malaysia $12,000 Venezuela Mexico Uruguay Costa Rica Romania South Africa Iran Kazakhstan Brazil Dominican Republic Azerbaijan (14.9%) $8,000 Turkey Belize Ecuador Thailand Colombia Algeria Tunisia Ukraine Egypt Turkmenistan China Syria Jordan Sri Lanka Georgia $4,000 Indonesia Papua New Guinea El Salvador Philippines Mongolia India Senegal Pakistan Laos Cote d’Ivoire Nigeria Vietnam Kenya Kyrgyz Rep. Cambodia Togo Madagascar Rwanda Ghana Bangladesh Uzbekistan $0 -3.0% -1.5% 0.0% 1.5% 3.0% 4.5% 6.0% 7.5% 9.0% Growth of Real GDP per Capita (PPP-adjusted), CAGR, 1998-2007 Source: EIU (2008), authors calculations. Mongolia data for 1998-2006, from World Development Indicators Competitiveness Master - 2008-05-22.ppt 2 Copyright 2008 © Professor Michael E. Porter
  • 3. Mongolia’s Competitive Position in 2008 • Mongolia has experienced fast GDP growth since 2000, reaping the benefits of earlier reforms and benevolent external conditions However • Growth is narrowly based on few sectors of the economy and driven by external factors, i.e. world prices of natural resource • The macroeconomic challenges of fast growth are not under control with inflation at high and rising levels • Political pressure to move focus from economic reforms towards the distribution of windfall gains from exports • Mongolia needs a new focus on upgrading competitiveness Competitiveness Master - 2008-05-22.ppt 3 Copyright 2008 © Professor Michael E. Porter
  • 4. What is Competitiveness? • Competitiveness depends on the productivity with which a nation uses its human, capital, and natural resources. – Productivity sets the sustainable standard of living (wages, returns on capital, returns on natural resources) that a country can sustain – It is not what industries a nation competes in that matters for prosperity, but how productively it competes in those industries – Productivity in a national economy arises from a combination of domestic and foreign firms – The productivity of “local” or domestic industries is fundamental to competitiveness, not just that of export industries • Nations compete to offer the most productive environment for business • The public and private sectors play different but interrelated roles in creating a productive economy Competitiveness Master - 2008-05-22.ppt 4 Copyright 2008 © Professor Michael E. Porter
  • 5. Sources of Prosperity Inherited Prosperity Inherited Prosperity Created Prosperity Created Prosperity •• Prosperity is derived from selling or Prosperity is derived from selling or •• Prosperity is derived from creating more Prosperity is derived from creating more exploiting inherited natural resources exploiting inherited natural resources and more valuable products and and more valuable products and services with rising efficiency services with rising efficiency •• Prosperity is constrained Prosperity is constrained •• Prosperity is unlimited Prosperity is unlimited •• Government is the central actor in the Government is the central actor in the •• Companies are the central actors in the Companies are the central actors in the economy as the owner and distributor of economy as the owner and distributor of economy economy resource wealth resource wealth – Prosperity can only be created by – Prosperity can only be created by – Resource revenues allow – Resource revenues allow firms firms unproductive policies and practices unproductive policies and practices to persist to persist •• Government’s role gravitates towards Government’s role gravitates towards •• Government’s role is to create the Government’s role is to create the the distribution of wealth as interest the distribution of wealth as interest enabling conditions for productivity enabling conditions for productivity groups seek a bigger share of the pie groups seek a bigger share of the pie and foster private sector development and foster private sector development Competitiveness Master - 2008-05-22.ppt 5 Copyright 2008 © Professor Michael E. Porter
  • 6. Mongolia’s Export Share Trends World Export Market Share (current USD) 0.08% Processed Goods Semi-processed Goods 0.07% Unprocessed Goods Services 0.06% TOTAL 0.05% 0.04% 0.03% 0.02% 0.01% 0.00% 1996 1998 2000 2002 2004 2006 Source: WTO (2008) Competitiveness Master - 2008-05-22.ppt 6 Copyright 2008 © Professor Michael E. Porter
  • 7. Inward Foreign Investment Flows Mongolia, 1991 - 2006 Inward FDI (USD, millions) $200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 1991 1994 1997 2000 2003 2006 Note: Data not available for 1994. Source: UNCTAD (2007) 7 Copyright © 2007 Professor Michael E. Porter GCR South Africa 062007.ppt
  • 8. Foreign Direct Investment By Industry Destination, 2006 Source: Annual Report, 2006), Mongolia Central Bank (2008) Competitiveness Master - 2008-05-22.ppt 8 Copyright 2008 © Professor Michael E. Porter
  • 9. Determinants of Competitiveness Microeconomic Competitiveness Quality of the Sophistication National State of Cluster of Company Business Development Operations and Environment Strategy Macroeconomic Competitiveness Social Infrastructure Macroeconomic and Political Policies Institutions Endowments • Macroeconomic competitiveness creates the potential for high productivity, but is not sufficient • Productivity ultimately depends on improving the microeconomic capability of the economy and the sophistication of local competition Competitiveness Master - 2008-05-22.ppt 9 Copyright 2008 © Professor Michael E. Porter
  • 10. Macroeconomic Competitiveness Social Infrastructure and Macroeconomic Political Institutions Policies • Basic human capacity • Fiscal policy – Education – Health • Safety and security • Monetary policy • Political institutions • Economic openness • Rule of law Competitiveness Master - 2008-05-22.ppt 10 Copyright 2008 © Professor Michael E. Porter
  • 11. Corruption Perception Index Ranking (constant Central Asian Countries sample, 158 countries) 180 2005 CPI Rank 2006 CPI Rank 160 2007 CPI Rank 140 120 100 80 60 40 20 0 n n ia n an n na an ia a ija a ta ta si ol rg st t hi st s is us is ba g eo i kh C yz en ek on jik R er G rg za Ta zb m M Az Ky Ka rk U Tu Note: Ranks only available starting in 2005 for all 5 countries Source: Global Corruption Report, 2007 11 Copyright 2008 © , M. Porter
  • 12. Ka za 0 20 40 60 80 100 120 140 160 kh st an Bu lg Rank (157 ar countries) ia Ro m an ia Ar m en ia Uk ra in M e Ky on rg go yz l ia R ep Tu ub rk lic m en is ta Az n er ba i ja Ta n ji k is ta Source: Index of Economic Freedom (2008), Heritage Foundation n Th ai la nd In do ne sia Bu rm 12 a Ch in Sr a iL an Uz ka be ki Ko st re an a, So Openness to Trade ut Selected Countries, 2008 Pa h kis ta n Vi et na m Ira n La Ca os m bo di a In di a Ru Ba ss ia ng la de Copyright 2008 © , M. Porter sh
  • 13. Microeconomic Competitiveness Mongolia’s Position over Time Rank 95 96 97 2006 98 2007 99 100 101 Business Comptitiveness Company Operations & National Business Index Strategy Environment Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 13 Copyright 2008 © Professor Michael E. Porter
  • 14. Microeconomic Competitiveness: Quality of the Business Environment Context for Context for Firm Firm Strategy Strategy and Rivalry and Rivalry Local rules and incentives that encourage investment and productivity Factor – e.g. salaries, incentives for Factor Demand (Input) capital investments, intellectual Demand (Input) property protection Conditions Conditions Conditions Conditions Vigorous local competition Access to high quality – Openness to foreign and local Sophistication of local competition business inputs customers and needs – Natural endowments – Strict quality, safety, and – Human resources Related and Related and environmental standards – Capital availability Supporting Supporting – Physical infrastructure Industries Industries – Administrative infrastructure (e.g. registration, permitting) Availability of suppliers and – Information infrastructure supporting industries (e.g., transparency) – Scientific and technological infrastructure • Many things matter for competitiveness • Successful economic development is a process of successive upgrading, in which the business environment improves to enable increasingly sophisticated ways of competing Competitiveness Master - 2008-05-22.ppt 14 Copyright 2008 © Professor Michael E. Porter
  • 15. Ease of Doing Business Mongolia, 2007 Ranking, 2007 (of 178 countries) Favorable Unfavorable 175 Median Ranking, 150 East Asia and Pacific Mongolia’s per capita GDP rank: 127 125 100 75 50 25 0 Ease of Registering Protecting Enforcing Dealing Starting a Employing Getting Paying Closing a Trading Doing Property Investors Contracts with Business Workers Credit Taxes Business Across Business Licenses Borders Rank Source: World Bank Report, Doing Business (2008) Competitiveness Master - 2008-05-22.ppt 15 Copyright 2008 © Professor Michael E. Porter
  • 16. Factor Factor (Input) Factor (Input) Conditions (Input) Conditions Conditions Mongolia’s Relative Position 2007 Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Availability of scientists and engineers 46 Port infrastructure quality 110 Quality of math and science education 58 Ease of access to loans 110 Venture capital availability 110 Railroad infrastructure development 64 Overall infrastructure quality 109 Business costs of corruption 67 Air transport infrastructure quality 107 Cooperation in labor-employer relations 68 Quality of management schools 107 Freedom from corruption 72 Efficiency of legal framework 99 Quality of electricity supply 97 University/industry research collaboration 74 Telephone/fax infrastructure quality 96 Local equity market access 79 Reliability of police services 96 Quality of scientific research institutions 81 Judicial independence 96 Quality of public schools 88 Laws relating to ICT 95 Financial market sophistication 94 Change up/down of more than 5/10 ranks since 2006 Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 16 Copyright 2008 © Professor Michael E. Porter
  • 17. Context for Context for Firm Strategy Firm Strategy Context for Strategy and Rivalry and Rivalry and Rivalry Mongolia's Relative Position 2007 Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Property rights 108 Prevalence of trade barriers 108 Decentralization of corporate activity 107 Intellectual property protection 103 Favoritism in decisions of government 101 officials Change up/down of more than 5/10 ranks since 2006 Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 17 Copyright 2008 © Professor Michael E. Porter
  • 18. Demand Demand Demand Conditions Conditions Conditions Mongolia's Relative Position 2007 Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Stringency of environmental regulations 111 Presence of demanding regulatory 101 standards Government procurement of advanced 90 technology products Change up/down of more than 5/10 ranks since 2006 Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 18 Copyright 2008 © Professor Michael E. Porter
  • 19. Related and Related and Supporting Supporting Related and Supporting Industries Industries Industries Mongolia's Relative Position 2007 Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Local availability of specialized research 78 Local supplier quantity 110 and training services Local supplier quality 109 Local availability of process machinery 100 Change up/down of more than 5/10 ranks since 2006 Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 19 Copyright 2008 © Professor Michael E. Porter
  • 20. Rate of Competitiveness Improvement Low Income Countries, 2006 - 2007 BCI Value, 2007 High India Indonesia Sri Lanka Kenya El Salvador Pakistan Nigeria Tanzania Vietnam Gambia Honduras Mongolia Uganda Moldova Mali Benin Tajikistan Georgia Zimbabwe Madagascar Bangladesh Cambodia Kyrgyz Rep. Ethiopia Mozambique Bolivia Cameroon Paraguay Low Nicaragua Chad Below average Average Above average Dynamism Score, 2006 - 2007 Note, dynamism score uses moving average, using data from 2005 – 2007. Source: Global Competitiveness Report 2007 Competitiveness Master - 2008-05-22.ppt 20 Copyright 2008 © Professor Michael E. Porter
  • 21. Microeconomic Competitiveness: State of Cluster Development Tourism Cluster in Cairns, Australia Public Relations & Public Relations & Local retail, Local retail, Market Research Market Research Travel agents Tour operators health care, and health care, and Travel agents Tour operators Services Services other services other services Food Food Local Local Suppliers Suppliers Attractions and Attractions and Transportation Transportation Restaurants Activities Activities Restaurants e.g., theme parks, e.g., theme parks, casinos, sports casinos, sports Property Property Souvenirs, Souvenirs, Services Services Duty Free Duty Free Airlines, Airlines, Hotels Hotels Banks, Banks, Maintenance Maintenance Cruise Ships Cruise Ships Foreign Foreign Services Services Exchange Exchange Government agencies Government agencies Educational Institutions Educational Institutions Industry Groups Industry Groups e.g. Australian Tourism Commission, e.g. Australian Tourism Commission, e.g. James Cook University, e.g. James Cook University, e.g. Queensland Tourism e.g. Queensland Tourism Great Barrier Reef Authority Great Barrier Reef Authority Cairns College of TAFE Cairns College of TAFE Industry Council Industry Council Sources: HBS student team research (2003) - Peter Tynan, Chai McConnell, Alexandra West, Jean Hayden Competitiveness Master - 2008-05-22.ppt 21 Copyright 2008 © Professor Michael E. Porter
  • 22. The Kenyan Cut Flower Cluster Trade Performance Kenyan Cut Flower Kenyan Cut Flower Exports in thousand US $ World Export Market Share $350,000 5.0% Value 4.5% $300,000 Market Share 4.0% $250,000 3.5% 3.0% $200,000 2.5% $150,000 2.0% $100,000 1.5% 1.0% $50,000 0.5% $0 0.0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. Competitiveness Master - 2008-05-22.ppt 22 Copyright 2008 © Professor Michael E. Porter
  • 23. Kenya’s Cut Flower Cluster Sources: Student team research by Kusi Hornberger, Nick Ndiritu, Lalo Ponce-Brito, Melesse Tashu, and Tijan Watt, Microeconomics of Competitiveness Course, 2007 Competitiveness Master - 2008-05-22.ppt 23 Copyright 2008 © Professor Michael E. Porter
  • 24. Process of Cluster Development The Australian Wine Cluster 1930 1965 1980 1991 to Present First oenology Australian Wine Australian Wine New organizations course at Bureau and Brandy created for education, Roseworthy established Corporation research, market Agricultural established 1990 information, and College 1955 1970 export promotions Winemaker’s Australian Wine Winemaking Federation of Research school at Australia Institute founded Charles Sturt established University founded 1950s 1960s 1970s 1980s 1990s 2005 Import of Recruiting of Continued inflow Creation of Surge in exports and European winery experienced of foreign capital large number international technology foreign investors, and of new wineries acquisitions e.g. Wolf Bass management Source: Michael E. Porter and Örjan Sölvell, The Australian Wine Cluster – Supplement, Harvard Business School Case Study, 2002 Competitiveness Master - 2008-05-22.ppt 24 Copyright 2008 © Professor Michael E. Porter
  • 25. National Cluster Export Portfolio Mongolia, 1997-2006 0.10% Change In Jewelry, Precious Metals and Mongolia’s Overall Collectibles (+0.118%, +0.118%) World Export Share: Coal and Briquettes Metal Mining and Manufacturing 0.00748% 0.08% Mongolia’s world export market share, 2006 Textiles Leather and Related Products 0.06% 0.04% Transportation and Logistics Apparel Hospitality and Tourism 0.02% Mongolia’s Average World Export Share: 0.0158% Communication Services Agricultural Products Chemical Products Furniture 0.00% -0.03% -0.02% -0.01% 0.00% 0.01% 0.02% 0.03% 0.04% 0.05% 0.06% 0.07% 0.08% 0.09% 0.10% Change in Mongolia’s world export market share, 1997 – 2006 Exports of US$160 Million Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. = Competitiveness Master - 2008-05-22.ppt 25 Copyright 2008 © Professor Michael E. Porter
  • 26. National Cluster Export Portfolio Mongolia, 1997-2006 0.0040% Financial Services 0.0035% Mongolia’s world export market share, 2006 0.0030% 0.0025% Business Services 0.0020% Oil and Gas Prefabricated Enclosures and Structures Heavy Machinery 0.0015% Tobacco Publishing and Printing 0.0010% Motor Driven Products Communication Services Aerospace Vehicles and Defense Automotive 0.0005% Footwear Sporting, Recreational and Children's Goods Plastics Analytical Instruments Lighting and Electrical Equipment Entertainment Production Technology Communications Equipment Forest Products Information Technology 0.0000% -0.004% -0.003% -0.002% -0.001% 0.000% 0.001% 0.002% 0.003% 0.004% Change in Mongolia’s world export market share, 1997 – 2006 Exports of US$6.6 Million = Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database and the IMF BOP statistics. Competitiveness Master - 2008-05-22.ppt 26 Copyright 2008 © Professor Michael E. Porter
  • 27. Mongolia Exports by Subcluster Agriculture, 1997 - 2006 0.030% Overall change in the Agriculture Subcluster World Meat and Related Products Export Share : -0.005% 0.025% Subcluster’s share of World exports, 2006 0.020% 0.015% 0.010% Agriculture Subcluster Overall Export Share: +0.008% Vegetables and Fruits Sugars and Molasses 0.005% Oils and Fats Spirits and Misc. Fermented Beverages Specialty Agricultural Products Feeding Materials Plants and Flowers 0.000% -0.008% -0.006% -0.004% -0.002% 0.000% 0.002% 0.004% 0.006% 0.008% Change in Subcluster’s share of World Exports, 1997 – 2006 Exports of US$6.5 million = Source: Prof. Michael E. Porter, Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Competitiveness Master - 2008-05-22.ppt 27 Copyright 2008 © Professor Michael E. Porter
  • 28. Creating Competitiveness Linkages Across Clusters Fishing & Textiles Fishing Entertainment Prefabricated Products Hospitality Enclosures & Tourism Agricultural Products Transportation Furniture Distribution & Logistics Building Services Aerospace Fixtures, Construction Vehicles & Equipment & Materials Jewelry & Information Defense Services Precious Tech. Heavy Processed Metals Lightning & Business Construction Food Services Analytical Electrical Services Education & Instruments Equipment Knowledge Medical Power Forest Financial Generation Products Creation Devices Services Communi- Publishing cations & Printing Biopharma- Equipment Heavy ceuticals Machinery Motor Driven Production Apparel Chemical Products Technology Products Tobacco Leather & Oil & Related Gas Metal Automotive Products Plastics Aerospace Manufacturing Engines Footwear Sporting & Recreation Goods Note: Clusters with overlapping borders or identical shading have at least 20% overlap (by number of industries) in both directions. Competitiveness Master - 2008-05-22.ppt 28 Copyright 2008 © Professor Michael E. Porter
  • 29. The Evolution of Regional Economies San Diego Hospitality and Tourism Climate Climate Sporting and and and Leather Goods Transportation Geography Geography and Logistics Power Generation Aerospace Vehicles Communications and Defense Equipment U.S. U.S. Information Technology Military Military Analytical Instruments Education and Knowledge Creation Medical Devices Bioscience Bioscience Biotech / Pharmaceuticals Research Research Centers Centers 1910 1930 1950 1970 1990 Competitiveness Master - 2008-05-22.ppt 29 Copyright 2008 © Professor Michael E. Porter
  • 30. Microeconomic Competitiveness: Company Sophistication Firm Infrastructure (e.g. Financing, Planning, Investor Relations) Human Resource Management Support (e.g. Recruiting, Training, Compensation System) Activities Technology Development (e.g. Product Design, Testing, Process Design, Material Research, Market Research) M Value Procurement a (e.g. Components, Machinery, Advertising, Services) r What g buyers are Inbound Operations Outbound Marketing After-Sales i willing to Logistics Logistics & Sales Service pay n (e.g. Incoming (e.g. Assembly, (e.g. Order (e.g. Sales (e.g. Installation, Material Component Processing, Force, Customer Storage, Data Fabrication, Warehousing, Promotion, Support, Collection, Branch Report Advertising, Complaint Service, Operations) Preparation) Proposal Resolution, Customer Writing, Web Repair) Access) site) Primary Activities • Competitiveness requires that local companies upgrade the quality of the value chain Competitiveness Master - 2008-05-22.ppt 30 Copyright 2008 © Professor Michael E. Porter
  • 31. Company Sophistication Relative Position of Mongolian Companies, 2007 Competitive Advantages Competitive Disadvantages Relative to GDP per Capita Relative to GDP per Capita Nature of competitive advantage 75 Value chain presence 111 Production process sophistication 80 Breadth of international markets 108 Company spending on research and 83 Reliance on professional management 106 development Control of international distribution 105 Extent of staff training 84 Extent of marketing 101 Degree of customer orientation 100 Extent of incentive compensation 97 Willingness to delegate authority 96 Extent of regional sales 94 Prevalence of foreign technology 94 licensing Change up/down of more than 5/10 ranks since 2006 Note: Rank versus 111 countries; overall, Mongolia ranks 90th in 2007 PPP adjusted GDP per capita and 99th in Business Competitiveness. Source: Institute for Strategy and Competitiveness, Harvard University (2007), Mongolia GDP from the World Bank Competitiveness Master - 2008-05-22.ppt 31 Copyright 2008 © Professor Michael E. Porter
  • 32. Geographic Influences on Competitiveness World Economy World Economy Broad Economic Areas Broad Economic Areas Groups of Neighboring Groups of Neighboring Nations Nations Nation Nation States, Provinces States, Provinces Metropolitan Areas Sub-National Economies Metropolitan Areas Rural Areas Rural Areas Competitiveness Master - 2008-05-22.ppt 32 Copyright 2008 © Professor Michael E. Porter
  • 33. Specialization of Regional Economies Selected U.S. Geographic Areas Denver, CO Denver, CO Chicago Chicago Leather and Sporting Goods Leather and Sporting Goods Communications Equipment Communications Equipment Oil and Gas Boston Boston Oil and Gas Processed Food Processed Food Seattle-Bellevue- Aerospace Vehicles and Defense Analytical Instruments Analytical Instruments Seattle-Bellevue- Aerospace Vehicles and Defense Heavy Machinery Heavy Machinery Everett, WA Education and Knowledge Creation Education and Knowledge Creation Everett, WA Communications Equipment Aerospace Vehicles Aerospace Vehicles Wichita, KS Pittsburgh, PA Communications Equipment Wichita, KS Pittsburgh, PA and Defense and Defense Aerospace Vehicles and Aerospace Vehicles and Construction Materials Construction Materials Fishing and Fishing Fishing and Fishing Defense Defense Metal Manufacturing Metal Manufacturing Products Products Heavy Machinery Heavy Machinery Education and Knowledge Education and Knowledge Analytical Instruments Analytical Instruments Oil and Gas Oil and Gas Creation Creation San Francisco- San Francisco- Oakland-San Jose Oakland-San Jose Bay Area Bay Area Communications Communications Equipment Equipment Agricultural Agricultural Raleigh-Durham, NC Raleigh-Durham, NC Products Products Communications Equipment Communications Equipment Information Information Information Technology Information Technology Technology Technology Education and Education and Knowledge Creation Knowledge Creation Los Angeles Area Los Angeles Area Apparel Apparel Atlanta, GA San Diego Atlanta, GA Building Fixtures, Building Fixtures, San Diego Construction Materials Leather and Sporting Goods Construction Materials Equipment and Equipment and Leather and Sporting Goods Transportation and Logistics Power Generation Houston Transportation and Logistics Services Services Power Generation Houston Business Services Education and Knowledge Oil and Gas Products and Services Business Services Entertainment Entertainment Education and Knowledge Oil and Gas Products and Services Creation Creation Chemical Products Chemical Products Heavy Construction Services Heavy Construction Services Note: Clusters listed are the three highest ranking clusters in terms of share of national employment. Source: Cluster Mapping Project, Institute for Strategy and Competitiveness, Harvard Business School, 11/2006. Competitiveness Master - 2008-05-22.ppt 33 Copyright 2008 © Professor Michael E. Porter
  • 34. Mongolia’s Provinces (Aimags) Competitiveness Master - 2008-05-22.ppt 34 Copyright 2008 © Professor Michael E. Porter
  • 35. Geographic Influences on Competitiveness World Economy World Economy Broad Economic Areas Broad Economic Areas Groups of Neighboring Groups of Neighboring Nations The Neighborhood Nations Nation Nation States, Provinces States, Provinces Metropolitan Areas Metropolitan Areas Rural Areas Rural Areas Competitiveness Master - 2008-05-22.ppt 35 Copyright 2008 © Professor Michael E. Porter
  • 36. The Neighborhood Northeast Asia • Economic coordination among neighboring countries can significantly enhance competitiveness • Integration offers greater opportunities than participation in broader economic forums (e.g., APEC) Competitiveness Master - 2008-05-22.ppt 36 Copyright 2008 © Professor Michael E. Porter
  • 37. Regional Economic Strategy • Defining a strategic role for the region in the continent and the world economy • Opening internal trade and investment • Achieving synergies in enhancing the business environment • Facilitating cross-border cluster development • Enhancing company capabilities and non-traditional exports • Raising productivity • Increasing the attractiveness of the region as a whole for foreign investment • Winning greater support from the international community • Accelerating economic policy at the national level But • Cross-national collaboration is not a substitute for national microeconomic reforms East African Business Summit – final.ppt 37 Copyright 2008 © , M. Porter
  • 38. Economic Coordination Among Neighbors Capturing Synergies Factor Factor Context for Context for Related and Related and Regional Regional Demand Demand Macroeconomic Macroeconomic (Input) (Input) Strategy Strategy Supporting Supporting Strategy & Strategy & Conditions Conditions Competitiveness Competitiveness Conditions Conditions and Rivalry and Rivalry Industries Industries Governance Governance • Improving regional • Eliminating • Harmonizing • Facilitating • Coordinating • Creating a transportation trade and environmental cross-border programs to regional strategy infrastructure investment standards cluster improve public and marketing barriers within upgrading, e.g. safety program • Creating an • Harmonizing the region efficient energy product safety – Tourism • Coordinating • Sharing best network • Simplifying standards macro-economic practices in – Agribusiness and policies government • Enhancing regional • Establishing harmonizing – Transport & operations communications reciprocal cross-border Logistics and connectivity consumer • Creating regional regulations protection laws – Business institutions • Linking financial and paperwork services – Dispute markets • Coordinating • Opening resolution anti-monopoly government mechanisms • Opening the and fair procurement – Regional movement of competition within the region development students for higher policies bank education • Harmonizing • Developing a administrative regional position requirements for with businesses international organizations East African Business Summit – final.ppt 38 Copyright 2008 © , M. Porter
  • 39. Strategy for Cross-National Regions Central American Logistical Corridor Belize Mexico Guatemala Honduras Nicaragua El Salvador Roads Ports Airports Logistic Corridor Costa Rica Country Boundary Panama East African Business Summit – final.ppt 39 Copyright 2008 © , M. Porter
  • 40. The Process of Economic Development Shifting Roles and Responsibilities Old Model Old Model New Model New Model •• Government drives economic Government drives economic •• Economic development is a Economic development is a development through policy development through policy collaborative process involving collaborative process involving decisions and incentives decisions and incentives government at multiple levels, government at multiple levels, companies, teaching and companies, teaching and research institutions, and private research institutions, and private sector organizations sector organizations • Competitiveness must become a bottom-up process in which many individuals, companies, and institutions take responsibility • Every community and cluster can take steps to enhance competitiveness • The private sector must become more engaged in competitiveness to improve rapidly Competitiveness Master - 2008-05-22.ppt 40 Copyright 2008 © Professor Michael E. Porter
  • 41. Role of the Private Sector in Economic Development • A company’s competitive advantage depends partly on the quality of the business environment • A company gains advantages from being part of a cluster • Companies have a strong role to play in upgrading their business environment • Take an active role in upgrading the local infrastructure • Nurture local suppliers and attract foreign suppliers • Work closely with local educational and research institutions, to upgrade their quality and create specialized programs addressing the cluster’s needs • Inform government on regulatory issues and constraints bearing on cluster development • Focus corporate philanthropy on enhancing the local business environment • An important role for trade associations – Greater influence if many companies are united – Cost sharing between members Competitiveness Master - 2008-05-22.ppt 41 Copyright 2008 © Professor Michael E. Porter
  • 42. Defining an Economic Strategy National Value Proposition National Value Proposition • What is the unique competitive position of the nation or region given its location, legacy, and existing and potential strengths? – What roles with neighbors, the region, and the broader world? – What unique value as a business location? – For what types of activities and clusters? Achieving and Maintaining Parity Achieving and Maintaining Parity Developing Unique Strengths Developing Unique Strengths with Peers with Peers • What elements of macroeconomic • What weaknesses must be addressed to competitiveness and the business achieve parity with peer countries? environment are crucial priorities? • What existing and emerging clusters should be developed first? • Priorities and sequencing are necessity in economic development Competitiveness Master - 2008-05-22.ppt 42 Copyright 2008 © Professor Michael E. Porter
  • 43. Toward A Rwandan Economic Strategy What is Unique about Rwanda? Some Implications • Low corruption • Rwanda must maintain stability, safety, • Stable orderliness, and lack of corruption at all • Secure and safe costs • Clean • Rwanda must accelerate improvement of • Responsive skills and business infrastructure, • Integrated economic and social managerial skills, ease of doing business development • Kigali must become a vibrant capital city • Unique climate and growing conditions • Rwanda should seize the opportunity to • Central location on the African transform agriculture continent • Rwanda is unlikely to be competitive in • Established positions in tea, coffee, exporting bulky goods with low value-to- tourism weight • Opportunity to lead the region in ICT and services • Rwanda should develop air freightable goods and services exports to nullify its • Social innovator in health, education, reconciliation, gender equality, and logistical disadvantages other areas – eg, silk, flowers • Disproportionate external interest in • Rwanda in inextricably linked with its the country neighbors • A new model of African development Competitiveness Master - 2008-05-22.ppt 43 Copyright 2008 © Professor Michael E. Porter
  • 44. Rwanda’s Competitiveness Agenda Business Environment Business Environment Cluster Development Cluster Development • Land use • Activate a formal cluster development • Physical infrastructure program led by the private sector – Airport / air service • Established clusters – Connectivity – Tea – Economic zones – Coffee • Energy – Tourism – Renewable – Mining • Skills development • Emerging clusters • Build towns and increase urbanization – Logistics and transport outside of Kigali – Construction and real estate • Institutional capacity building – ICT services • Improve government efficiency and cross – Specialty agriculture (e.g., silk, flowers) agency coordination – Health and other social services – Arts and culture (Hillywood) Private Sector Private Sector Neighborhood Neighborhood • Upgrade private sector capabilities • Lead economic integration with • Engage the private sector in economic neighboring countries development – e.g., Road transportation efficiency • Support cooperative private investment funds – Railway development to jumpstart the private equity market – Energy grid Competitiveness Master - 2008-05-22.ppt 44 Copyright 2008 © Professor Michael E. Porter
  • 45. Economic Diversification Upgrade the Quality and Upgrade the Quality and Upgrade local Upgrade local Efficiency of Existing Export Efficiency of Existing Export industries/clusters industries/clusters Products and Services Products and Services Broaden Existing Clusters, Broaden Existing Clusters, Build Clusters Around Strong Build Clusters Around Strong Including Resources Clusters Including Resources Clusters MNCs MNCs Develop Related Clusters Develop Related Clusters Build Positions in Clusters that Build Positions in Clusters that Invest in Enabling Conditions Invest in Enabling Conditions are Strong in Neighboring are Strong in Neighboring for Areas with Some cluster for Areas with Some cluster Regions Regions Specific Advantages Specific Advantages Competitiveness Master - 2008-05-22.ppt 45 Copyright 2008 © Professor Michael E. Porter
  • 46. Clusters and Economic Policy Science and Education and Technology Workforce Training Investments (e.g., centers, university Management Training departments, technology transfer) Standard setting and Business Attraction quality initiatives Clusters Export Promotion Environmental Stewardship Market Information Natural Resource and Disclosure Protection Physical Infrastructure • Clusters provide a framework for implementing public policy and organizing public-private collaboration to enhance competitiveness Competitiveness Master - 2008-05-22.ppt 46 Copyright 2008 © Professor Michael E. Porter
  • 47. “Mongolia is at a critical juncture. Having completed its transition to a market-oriented economy, the challenge now is to attain global competitiveness. This requires a concerted and coordinated effort among all stakeholders, private and public, domestic and foreign.” David Dollar, Country Director for Mongolia, World Bank, 29. January 2008 Competitiveness Master - 2008-05-22.ppt 47 Copyright 2008 © Professor Michael E. Porter
  • 48. Established Mongolian Export Products Leading Exports by Value, 2006 World Change in Export Value (in Industry Cluster Export Share (1997- $thousands) Share 2006) 1 Copper ores and concentrates Metal Mining and Manufacturing 2.16% -1.62% $ 635,426 2 Gold, non-monetary, excluding ores Jewelry, Precious Metals and Collectibles 0.53% 0.53% $ 270,105 3 Wool, other animal hair Textiles 3.11% 2.15% $ 157,305 4 Zinc ores and concentrates Metal Mining and Manufacturing 1.08% 1.08% $ 91,140 5 Ores and concentrates of molybdenum, etc. Metal Mining and Manufacturing 0.51% -0.48% $ 47,793 6 Coal, not agglomerated Coal and Briquettes 0.09% 0.09% $ 45,076 7 Quartz, mica, felspar, fluorspar, etc. Chemical Products 3.85% -0.09% $ 35,067 8 Sheep, lamb skin leather Leather and Related Products 2.26% 2.26% $ 24,578 9 Crude petroleum oils Oil and Gas Products 0.00% 0.00% $ 19,841 10 Women’s trousers, breeches and shorts Apparel 0.09% 0.07% $ 18,183 11 Jerseys, pullovers, cardigans, knitted Apparel 0.06% 0.02% $ 17,617 12 Copper, copper anodes and alloys Metal Mining and Manufacturing 0.03% -0.01% $ 16,202 13 T-shirts, other vests, knitted Apparel 0.05% 0.05% $ 13,241 14 Other meat, meat offal Agricultural Products 0.03% 0.03% $ 11,488 15 Iron Ore and Concentrates Metal Mining and Manufacturing 0.04% 0.04% $ 11,478 16 Men’s or boys’ shirts Apparel 0.11% 0.05% $ 10,390 17 Goat or kid skin leather Leather and Related Products 1.34% 1.34% $ 7,985 18 Women’s suits, dresses, skirts, knitted Apparel 0.06% 0.06% $ 6,908 19 Fruit, nuts excluding oil nuts Agricultural Products 0.01% 0.01% $ 6,428 20 Other bovine, equine leather Leather and Related Products 0.04% 0.04% $ 6,285 21 Petroleum Oils Oil and Gas Products 0.00% 0.00% $ 5,317 22 Hides, skins (excluding furs), raw Agricultural Products 0.09% -0.33% $ 5,219 23 Other animal materials Agricultural Products 0.10% -0.02% $ 4,830 24 Men’s trousers, breeches and shorts Apparel 0.02% 0.02% $ 4,748 25 Bovine meat Agricultural Products 0.02% -0.05% $ 4,734 Processed Top 25 Industries (by value) as % of Mongolia’s total goods exports: 95.79% Semi-Processed Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. Unprocessed Competitiveness Master - 2008-05-22.ppt 48 Copyright 2008 © Professor Michael E. Porter
  • 49. Established Mongolian Export Products Leading Exports by Share, 2006 World Change in Export Value (in Industry Cluster Export Share (1997- $thousands) Share 2006) 1 Quartz, mica, felspar, fluorspar, etc. Chemical Products 3.85% -0.09% $ 35,067 2 Wool, other animal hair Textiles 3.11% 2.15% $ 157,305 3 Sheep, lamb skin leather Leather and Related Products 2.26% 2.26% $ 24,578 4 Copper ores and concentrates Metal Mining and Manufacturing 2.16% -1.62% $ 635,426 5 Goat or kid skin leather Leather and Related Products 1.34% 1.34% $ 7,985 6 Zinc ores and concentrates Metal Mining and Manufacturing 1.08% 1.08% $ 91,140 7 Gold, non-monetary, excluding ores Jewelry, Precious Metals and Collectibles 0.53% 0.53% $ 270,105 8 Ores of molybdenum, titanium, zirconium Metal Mining and Manufacturing 0.51% -0.48% $ 47,793 9 Balloons, and other non-powered aircraft Aerospace Vehicles and Defense 0.24% 0.24% $ 63 10 Bones, horns, ivory, coral and like products Agricultural Products 0.12% -0.65% $ 379 11 Men’s or boys’ shirts Apparel 0.11% 0.05% $ 10,390 12 Other animal materials Agricultural Products 0.10% -0.02% $ 4,830 13 Other non-ferrous ores and concentrates Metal Mining and Manufacturing 0.10% 0.03% $ 1,249 14 Carpets and other floor coverings, knotted Textiles 0.10% 0.10% $ 1,467 15 Coal, not agglomerated Coal and Briquettes 0.09% 0.09% $ 45,076 16 Hides, skins (excluding furs), raw Agricultural Products 0.09% -0.33% $ 5,219 17 Women’s trousers, breeches and shorts Apparel 0.09% 0.07% $ 18,183 18 Lignite Coal and Briquettes 0.08% 0.08% $ 124 19 Women’s blouses, and shirts, knitted Apparel 0.08% 0.08% $ 4,548 20 Other plastic waste and scrap Plastics 0.07% 0.07% $ 1,448 21 Men’s or boys’ shirts, knitted Apparel 0.06% 0.05% $ 3,109 22 Women’s suits, dresses, skirts, knitted Apparel 0.06% 0.06% $ 6,908 23 Jerseys, pullovers, cardigans, knitted Apparel 0.06% 0.02% $ 17,617 24 Men’s or boys’ jackets and blazers Apparel 0.06% 0.05% $ 2,309 25 Women’s or girls’ suits and ensembles Apparel 0.05% 0.05% $ 1,557 Processed Top 25 Industries (by share) as % of Mongolia’s total goods exports: 90.38% Semi-Processed Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. Unprocessed Competitiveness Master - 2008-05-22.ppt 49 Copyright 2008 © Professor Michael E. Porter
  • 50. Upgrading Mongolian Export Portfolio Niche Positions Outside of Leading Clusters Industry Change in Cluster World Share of Export Value (in Cluster Subcluster Industry Share (1997- Export Share World $thousands) 2006) Exports Meat and Related Products Bones, horns, ivory, coral, etc. 0.12% -0.65% $ 379 Meat and Related Products Other animal materials 0.10% -0.02% $ 4,830 Agricultural Products 0.008% Meat and Related Products Hides, skins (excluding furs), raw 0.09% -0.33% $ 5,219 Meat and Related Products Other meat, meat offal 0.03% 0.03% $ 11,488 Meat and Related Products Bovine meat 0.02% -0.05% $ 4,734 Chemical Products 0.008% Misc. Crude Materials Quartz, mica, felspar, fluorspar, etc. 3.85% -0.09% $ 35,067 Oil and Gas Machinery Other boring machinery, not self-propelled 0.03% 0.03% $ 641 Oil and Gas Products 0.002% Oil and Gas Machinery Rock drills, earth borers 0.02% 0.02% $ 404 Prefabricated Enclosures and 0.002% Prefabricated Buildings Prefabricated buildings 0.02% 0.01% $ 1,101 Structures Heavy Machinery 0.002% Mining Machinery Rock/tunneling machinery, not self-propelled 0.02% 0.02% $ 85 Furniture 0.001% Wood Furnishings Wood for domestic use, not furniture 0.05% 0.05% $ 1,483 Aerospace Vehicles 0.001% Aircraft Balloons, and other non-powered aircraft 0.24% 0.24% $ 63 and Defense Motor Driven 0.001% Appliances Sewing machines and parts 0.03% 0.03% $ 1,230 Automotive 0.001% Motor Vehicles Assembly Other special purpose vehicles 0.03% 0.03% $ 1,195 Plastics 0.000% Plastic Waste Other plastic waste and scrap 0.07% 0.07% $ 1,448 Processed Semi-Processed Source: Prof. Michael E. Porter, International Cluster Competitiveness Project, Institute for Strategy and Competitiveness, Harvard Business School; Richard Bryden, Project Director. Underlying data drawn from the UN Commodity Trade Statistics Database. Unprocessed Competitiveness Master - 2008-05-22.ppt 50 Copyright 2008 © Professor Michael E. Porter
  • 51. Foreign Direct Investment By Source Country, 2006 Source: Annual Report, 2006), Mongolia Central Bank (2008) Competitiveness Master - 2008-05-22.ppt 51 Copyright 2008 © Professor Michael E. Porter
  • 52. G e 0 10 20 30 40 50 60 70 A z or er gia ba U ijan kr a Competitiveness Master - 2008-05-22.ppt Economy, 2003 Th ine C aila am n % of GDP in the Informal bo d d R ia Sr uss i ia P h Lan ili ka K a ppi za nes kh st an Source: World Bank Doing Business and Friedrich Schneider Ky Bra rg zi yz l Pa sta Ba kis n ng ta n U l ad zb es ek h is ta n 52 La M o al s ay s Ko ia re Ta a iw Selected Countries an In Ind do i a n M esi on a go lia Size of the Informal Economy Vi Ir an et na m Si Ch ng i na ap Au ore N ew str a Ze lia al an Ja d pa n Copyright 2008 © Professor Michael E. Porter
  • 53. So ut Pa h 0 10 20 30 40 50 60 pu Af a r ic Ne B a Gini Index w raz G il u M i ne al a Competitiveness Master - 2008-05-22.ppt ay s H C ia on Ph h g ilip ina Ko p ng ine , s Si Ch ng i n ap a Th ore C aila am n bo d Source: World Bank, World Development Indicators, 2007. Tu Ge dia rk or R m gi us en a si Sr ista an i L n F e an d ka Note: Most recent Gini index data available for each country (1999 – 2003). Ira I era n, nd tio I s on n la es m 53 ic ia Vi Rep et . na m U In zb d e ia A z ki s Selected Countries er tan Income Inequality ba Au ija st n La ral Ka o P ia za DR kh T a st a Ba jiki n ng sta la n M des K o on h re gol a, i a Ky P Re rg ak p. yz is R tan ep ub Ja l i c pa n Copyright 2008 © Professor Michael E. Porter
  • 54. Tests of a National Economic Strategy • Has the country articulated a distinctive position? – That will create a positive identity for the country? – That will inspire citizens? • Does the strategy build on strengths? – Are the strengths realistic versus neighbors and other peer countries? • Does the strategy fit with trends in the region and the world economy? • Is the strategy realistic given the country’s weaknesses. Can those weaknesses inconsistent with the strategy be neutralized? • Are social and political reforms integrated with economic reforms pursued simultaneously? • Is there the political will and the political consensus to implement the strategy? Competitiveness Master - 2008-05-22.ppt 54 Copyright 2008 © Professor Michael E. Porter
  • 55. Tests of a National Economic Strategy – cont’d • Do the policy priorities fit the strategy? – The choice of policies to address – The sequence in which policies are implemented? • Has the strategy been communicated clearly to the stakeholders? • Is the private sector engaged? • Is government organized around the strategy? • Is there an overall coordinating structure for economic development? • Is the quality of governmental agencies and other institutions sufficient for effective implementation? • Are there mechanisms to measure progress and review / modify the strategy as prosperity improves or conditions change? Competitiveness Master - 2008-05-22.ppt 55 Copyright 2008 © Professor Michael E. Porter

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